Merrill Is Bullish on Paper ClipsIt's off to a fast start in small-business E-commerce

This January, in a conference room at a Hyatt Hotel in Austin, Tex., John L. Steffens, vice-chairman of Merrill Lynch & Co., listened intently to a presentation by the head of a local Internet startup. Bo Holland, 34, explained how his company, works.com, lets small businesses buy everything from paper clips to pcs online. Right after the presentation, Steffens started negotiating an alliance. Says Holland: ''We were totally blown away by how quickly these guys were moving.''

When it comes to online trading, Merrill is playing catch-up to E*Trade Group Inc. and Charles Schwab & Co. But the Wall Street behemoth is racing for a foothold in a newer, equally hot Internet business: selling products and services to small businesses online, or b-to-b E-commerce.

EXCLUSIVITY. In early July, Merrill Lynch plans to announce a new service for the 400,000 small-business customers served by its Business Financial Services unit: buying office supplies on the Internet. Works.com customers already get a 15% discount, says Holland. Merrill believes it can negotiate additional discounts with some suppliers exclusively for its own small-business customers. Another advantage: Half of such customers use Merrill's small-business cash-management account, called WCMA, or Working Capital Management Account. They will be able to pay for, manage, and account for their works.com purchases centrally through their WCMAS. And they earn reward points on their WCMA Visa card for their works.com purchases.

Merrill says it doesn't expect to make any money from providing this service but hopes to ultimately attract more assets. While Merrill is best known for catering to individual investors, many of its 14,000 brokers' wealthiest customers are entrepreneurs who already have a total of $145 billion in WCMAS.

Online business procurement could become as popular as buying books online. Here's how Merrill's new service would work: For example, each of XYZ Co.'s 25 employees log on to Merrill Lynch OnLine, where they would link to a co-branded version of works.com. Employees put the items they want into an electronic shopping cart, generating a purchase request that is forwarded to an XYZ Co. approver. Once authorized, the order is received by the employee, as soon as the next day in the mail. Works.com obtains its office supplies directly from S.P. Richards Co., one of the largest U.S. office-products wholesalers. The expenditure would show up on the monthly corporate WCMA statement.

While buying pencils and envelopes online seems fairly pedestrian, the works.com alliance sheds light on Merrill's broader Internet strategy. By taking a 10% stake in works.com, Merrill has ditched the do-it-yourself approach. And it plans to sell computer equipment and airline tickets online, says Steffens, and later services such as printing and human resources. ''We're using our purchasing clout and passing the savings on to our customers,'' he says. ''It exemplifies the power that Merrill Lynch brings to the table.''

Merrill's objective is to become a major small-business Web site. ''Nobody knows what a business portal looks like yet,'' says Holland. ''Merrill's angle is to be a financial portal. We're betting that purchasing is a key capability for a business site, like search is key on a consumer portal.'' Bill Gurley, a works.com director and a partner at Benchmark Capital, a venture capital firm, maintains that Merrill and works.com are on to ''the biggest idea out there'' because the new service will automate the procurement process and tighten the supply chain by connecting Merrill's customers through their WCMA directly to wholesalers.

It's far too early to know whether Merrill's new venture will succeed. The competition is fierce, with others racing to provide their small-business customers with similar purchasing services, from software developer Ariba Inc. to American Express Co. to Staples.com. But at least this time, Merrill Lynch is early with a good idea.